SEC Announces New Enforcement Cooperation Initiative And Policies

New Securities and Exchange Commission initiative seeks to encourage individuals and corporations to cooperate and assist in investigations; new policy guidance is issued for individuals and supplements the prior Seaboard Report factors for business organizations; one factor concerns “[w]hether the individual provided non-privileged information, which information was not requested by the staff or otherwise might not have been discovered”

On January 13, 2010, the Securities and Exchange Commission (SEC) announced a new initiative to encourage individuals and companies to cooperate with investigations. In announcing the initiative, Robert S. Khuzami, Director, Division of Enforcement, U.S. Securities and Exchange Commission, noted:

“Our new cooperation program has the potential to be a game-changer for the Enforcement Division.

“For the first time, we will have a formal framework of incentives – incentives to secure the cooperation of persons who saw, heard and witnessed securities fraud first-hand – and who can walk into a courtroom, raise their right hand and tell their story to the world.”

See Remarks at Press Conference by Robert S. Khuzami, Director, Division of Enforcement, U.S. Securities and Exchange Commission

The SEC issued a new policy statement concerning cooperation by individuals. Some of the factors to assess individual cooperation include (a) the nature of the assistance provided; (b) the importance of the underlying matter; (c) the interest in holding the individual accountable; and (d) the profile of the individual. Of note, with regard to the nature of the assistance, the SEC policy statement takes into account: “Whether the individual provided non-privileged information, which information was not requested by the staff or otherwise might not have been discovered.” (Emphasis added). Last year, the Department of Justice modified it Corporate Prosecution Guidelines in part after criticisms were made concerning the acquisition of corporate communications protected by the attorney-client privilege. See Revised DOJ Corporate Prosecution Guidelines Issued.

With regard to cooperation by corporations and organizations, the SEC continues to apply the factors in the so-called “Seaboard Report,” officially entitled, "Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions," Exchange Act Release No. 44969.

The SEC also issued an updated version of its so-called “Red Book,” which is the Enforcement Manual, for the Division of Enforcement of the Securities and Exchange Commission. The updated manual includes guidance on possible cooperation tools, such as (a.) proffer agreements, (b.) cooperation agreements, (c.) deferred prosecution agreements, (d.) non-prosecution agreements, and (e.) immunity requests. See SEC Red Book, at 131-135. At a press conference, Director Khuzami highlighted three primary cooperation tools:

“First, Cooperation Agreements. They are formal written agreements in which the Division of Enforcement agrees to recommend to the Commission that a cooperator receive credit for cooperating in its investigations or related enforcement actions. Such credit will only be extended if the cooperator provides substantial assistance in those investigations and enforcement actions.

“Next are Deferred Prosecution Agreements. These are formal written agreements in which the Commission agrees to forego an enforcement action against a cooperator — if the individual or company agrees to cooperate fully and truthfully and to comply with certain reforms, controls and other undertakings.

“The last are Non-prosecution Agreements. These are formal written agreements, entered into under very limited and appropriate circumstances, in which the Commission agrees not to pursue an enforcement action against a cooperator. Here too the agreement would only be entered if the individual or company agrees to cooperate fully and truthfully in connection with an investigation or enforcement action and to comply with express undertakings.”

See Remarks at Press Conference by Robert S. Khuzami, Director, Division of Enforcement, U.S. Securities and Exchange Commission

Evidence and legal issues concerning the investigation and prosecution of corporations and corporate conduct will continue to be monitored on the Federal Evidence Blog and the Corporate Prosecution Principles Resource Page, which includes a wide variety of materials and links.

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